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Macro Morning – QEnfinity!

Stocks rallied, the US dollar fell lifting the euro, Australian dollar and others while gold, crude and copper all rose as well. The catalyst of course was the FOMC (Federal Reserve Open Market Committee) announcement which is clearly a victory both for Ben Bernanke and for the global economy.

The key thing you need to know about what the Fed did was that QE3 is open ended. That is, unlike QE’s 1 and 2 there is no fixed end amount of total purchases that it will conduct under this quantitative easing (QE) operation. Rather the Fed has committed to buy $40 billion Agency mortgages plus other reinvestments and operations equaling $85 billion a month until it sees the economy, particularly jobs, recover to a level that it is happy with.

That is a huge step and one that I have to applaud because what it does is it makes it certain that everyone understands that just like Mario Draghi’s ECB intervention in “unlimited amounts”, so too the Fed is going to just keep buying until the jobs market recovers. It also said rates will stay where they are until 2015. Importantly in buying agency mortgages the Fed is targeting the sector of the economy that was the source of the economic problem at the start. If housing is going to recover then this is the action will help because it should make pricing cheaper. Full FOMC Statement here

Crucially also – and bad news for Australia right now – is the USD is weaker again which is an additional positive for the US economy.

So I admit I didn’t think Ben had this big change of tack in him. And I didn’t think he had his board with him but only the usual slacker, Lacker, dissented from the decision. So I rise and give Ben and the FOMC a standing ovation. It is the second shoe to drop in the central banker two step and has the potential to change the investment dynamics in the market materially. We’ll address that in the wrap for Macro Investor this week along with the global economic malaise spreading around the globe.

So at the end of play the S&P 500 was up 1.63% to 1,459 and at a close at the highest level since December 2007. The Dow was up 1.55% or 206 points, that always sounds good doesn’t it? While the NASDAQ touched a 12 year high – yep 12 years – rising 1.69% to 3,155. Europe missed the big FOMC news and its bourses were not in such an ebullient mood. The FTSE rose 0.65%, while the DAX fell 0.45% and the CAC was very weak dropping 1.18%. Madrid was similarly under pressure dropping 0.82%. Expect Europe to catch up tonight.

In the FX markets it was a tail of US dollar weakness which lifted all boats. The Euro is up 0.67% day on day at 1.2985 after making a high just below 1.30 at 1.2997. The Pound was also buoyed by the Fed’s action and rose 0.24% to 1.6147. The Yen rose 0.5% (USD/JPY fell) to 77.47 and sits at its strongest against the USD since February this year.

The Australian dollar likewise was lifted by the USD fall but equally by the risk on rally. After the FMG news knocked the Aussie lower late yesterday to 1.0432 the Aussie was recovering before the Fed and rallied hard to a high of 1.0560 before settling back to 1.0540.

This is bad news for Australia because the US is exporting its troubles to stronger nations via QE and a weaker US dollar. This simply reinforces the RBA is going to have to ease – perhaps as soon as a couple of weeks.

On commodity markets the US fall lifted the CRB roughly half a percent with the usual intra-market divergences. Commodities really are a nice way to diversify risk. Crude rose 1.1% to $98.09 Bbl and looks likely to rally further. Gold jumped 1.93% to $1,767 and is also pointing higher. Copper also rose 1.15% both on US dollar weakness and hopes for stimulus to work economically. The second leg of this will fail but the USD element looks set to persist.

Lets have a look at some of the markets we follow using our AVATrade trading platform charts.

EUR/USD: The EUR rally continued and it hit our original target from a week or so ago of 1.30, close enough anyway with the high on the last Fibo level at 1.2997 overnight. It’s looking over done on the dailies as I noted yesterday but my jimmyR indicator says its still a bull market on both the 1 day and 4 hour charts so pullbacks are likely to be supported. A move through 1.30 opens the way to a full retracement to 1.3293. No charts today sorry.

AUD/USD: Last night’s price action and recovery off the 1.0432 low suggests to me that the jimmyR indicator that was in a daily downtrend is probably turned and the 4 hour chart was likewise in a bull trend. This suggests any pullbacks will continue to be bought. It’s now up to the bears to prove the Aussie shouldn’t go higher so be careful shorting.

DATA: Feet on the desk today when it comes to data worth worrying about.

And here is how the markets closed at 6.25 this morning courtesy of AVATrade

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Victory? Suicide may be more appropriate. Fed under Greenspan manufctured the gfc. Now Bernanke will lead the US towards political-economic crisis. If fed balance sheet keeps growing faster than gdp for long enough, then the mother of all crises will be upon us.

Guys – this is a morning note so it’s brief. I don’t normally extrapolate my thoughts – that’s for Macro Investor. But here is why I think it is a victory:

1) Bernanke and his thinking is evolving – just a few weeks ago at Jackson Hole he seemed to offer little but Woolfords paper seems to have impacted him. By evolving rather than remaining doctrinaire we have hope that he’ll get there in the end.
2) QE is open ended – this sends a clear signal to all Americans, consumer and business owner alike (hopefully bank managers too) that the Fed is going to keep rates low until a recovery is at hand – this should help confidence which in a massively consumption like the US is key
3) Bernanke is fighting deflation – he won’t say it because he can use unemployment as his stalking horse but in a deleveraging world lacking aggregate demand price pressures are down not up. He doe not want the US to turn into Japan. How you fight that is to pump money into the system and push the US dollar lower so commodities rise.

I think the third point is the most important but the evolution of Bernanke is the Victory. If the Political class is incapable of action then it’s only the central bankers how can do anything.

thanks for your thoughts, i enjoy my microinvestor reading. But the fed has led the us into the japan trap. It single handedly turned cyclical internet investment boom and a cyclic recession following the boom into the gfc. Now it is trying to stop the self healing process of deleveraging. QE is “working” by expanding fed balance sheet much faster than GDP. Even that produces only near stall growth. Where are we going to be in a decade’s time?

JD2 I think this is more than a normal cyclical recession…I think it is a 50 year beauty! There are really serious structural problems right through Govt., Corporations, right down as far as the way individuals think and act in our modern western society.
However, as you correctly point out, thee is no point in just expanding the fed balance sheet. That is just trying to restore the old unsustainable structures.
Without other changes the long-term effect will be at least negative and possibly catastrophic.

Bernanke’s thinking is evolving from where to where? Yes it appeared that he was apparently sitting pat for a while. So where has he evolved to? Are we now in a world where unlimited money printing is the policy? I’d think none of them can go back from here.
From this point on as inflation gathers pace we are all locked in.

Yes Flawsw I agree We will get inflation eventually of that I have no doubt but not yet – CB’s know how to fight inflation but they have no idea or answers for deflation and I think they know that so its best avoided

Greg
I’d question whether they see where the inflation is going to come from. I’m yet to see a statement from any CB recognising the shift in world demographics and prosperity that is at the core of the coming inflation problem for western economies.
So I don’t think they have any idea how to fight it. They just think they do!

Even if inflation arises in the direction that they think it will come, I’d question, with the debt levels in place, whether it can be stopped once it starts. If inflation gets to 2% will Bernanke raise rates to 3.0%…no chance. If inflation gets to 5% will Bernanke raise rates to 8%…no chance! He can’t.

“It’s now up to prove the Aussie shouldn’t go higher”..Yeah best of luck with that..ending,anyway would you settle for a bit of magic in flawse-times…
We’ll call it an instance..
Thanks G Jhttp://bilbo.economicoutlook.net/blog/?p=20935

Bill Mitchell has the algebra right but underestimates the fundamental problem. It’s not just a lack of growth. It’s not just a stupid inappropriate distribution of profits between wages and profits. It’s not just a list of a whole host of stupid things. The problems lie much deeper than he portrays.
ANY thing we do without recognising this issue is just digging a deeper hole. Govts have not exactly shown any great wisdom in their spending of the last 5 decades. So Govts running deficits are not going to fix the problems. They will just reinforce the old structures which have already been proven to be unsustainable.

I don’t have answers. At least i don’t have answers that don’t involve major dislocation. We ought be accepting that, in order to restructure, we are going to have dislocation. We are all inevitably going to feel a lot poorer. We should be working out how to share the pain rather than trying to restore the unsustainable and shoving all the pain onto the prudent savers.
Restructuring requires capital. Now we can go for more debt, by either drivel such as the ECB proposes or Govt deficits, or we can save. (Please MMTists don’t give me the line that Govts don’t have debts…as they can print their way out. We’re trying to look deeper than that) If we go for more debt then we better have a damned good plan and it better work. We better get very very productive very very fast which means dismantling the out of control service sectors, including government, very very fast. If the plan doesn’t we will end up with failed societies across the western world.
Bernanke et al haven’t a clue what they are risking.

Hey Flawse,it’s hard to keep a sight on what’s best..in short,But
Sharing in the pain or successes is governments being and spending responsibly,into their Micro-s,as it seems so-with as the Central B’s wash the bad..Sow’s
to the overall n,thus enabling a better efficiency to full-time employment..at times and in-being therefore,a wealth stimulus to the Private which in-turn spends via extra hours worked…I know sounds simple,when all the problems are in front of us,however,old Chap,n…at present..it’s a shame that it looks like the elderly are suffering in-net-saving and the young suffering..for being,in-netted
Thanks for the chat Cheers JR

The most stunning thing for me was that following the QE3 announcement the German DAX in after hours trade couldn’t even beat its high of the previous day, never mind make multi year highs like the US indexes.

How will it play out from here? No idea! But for context here are some long term S&P 500, DAX, and ASX 200 charts. All three are in the vicinity of multi year trend lines. Until all three market decisively beat their trend lines, I will be at best cautious about the prospects for a new global bull market.

Maybe if we just let things that don’t work disappear…..you know, free market thingys, then the need for attempting the old inflation-hidden-tax trick on Main Street might not be needed. My 2c soon to be 2.5c

“If only” we could abolish free markets?! Jesus Herbert Christ, some bizarre things spout from the minds of bloggers on this site. I have to scroll up periodically to make sure the masthead still reads Macro’Business’

You have exposed the flaw in the internet. Communication, they tell us, is mostly non-physical.

I read a lot of sarcasm in thedoctor’s comments, but that might be just me. If he is being sarcastic, then I agree with his underlying message.

I almost spat my egg-nog over the monitor reading Greg’s opening statements.

“Applaud the Fed”???? That’s the last thing I’ll ever do, I expect. They are one of the organisations with worst track record of both predicting (and assisting the resolution of) financial crises. They are either fools or working to another agenda. Perhaps both.

After reading the comments, I started to get a better feel for what Greg was saying. My read is that he’s applauding the simple fact that the Fed is moving at all. Greg may even agree that the Fed’s action may bring shorter term benefit (ie next 12 months or so), but reading between the lines it seems that Greg agrees that the Fed is fundamentally flawed.

I think the US will have less of a problem than Japan due to the differences in demographics and immigration – however their public health apocalypse which is very real and now, for example more than 30% of US adults are OBESE, is going to have a very interesting and significant impact moving forward with anticipated shorter life expectancy, lower productivity, increasing health care costs etc etc

I don’t know everything, Cullen Roche in the above article explains more succinctly than I could just how fundamentally wrong Bernanke’s approach is – on a time scale a little further out than the tip of one’s proboscis, that is.

I like Cullen Roche and I like his modified MMT approach in parts. I am also a follower of Minsky and his work on markets.

I think that Cullen is mixing his metaphors a little here though.

Bernanke is saying that in a consumption based economy confidence is king – on that he is right. To much confidence leads to the kind of ludicrous borrowing and spending we saw per GFC. Too little confidence has us where we are now.

Asset price inflation has always been the target of QE. Well that and the US Dollar weaker. I’m surprised Cullen implies this wasn’t always as it was.

What Bernanke is saying is that once people see the bottom and experience some small lift they can go about their daily lives with more confidence. I hope he’s not saying they’ll start using their house as a credit card again – I don’t believe he is.

In targeting employment as well he is trying to get more money circulating in the economy via new workers even if they wages and wage growth are low and stattic.

It’s where theory and practice collide – Bernanke has to try things that he thinks will work even at the margin to avoid another recession (which is a real chance) or even a depression.

It’s a flawed system with vested interests at every turn and slanted heavily in favor of established and big business.

I’m not sure he could have done much else right here and now – unless of course there is a debt moratorium on all home loan debt the banks go bust and get nationalized and we start gain.

Bernanke’s plan ignores the fact that there is an external account. If he gets his consumption going much of the extra expenditure will end up in the US external account. Now Bernanke thinks he can do this ad infinitum. He’s certainly managed it to greater levels than I thought possible. So he considers that the world must keep buying his UST ad infinitum. However reverting to Herb Stein ‘If something cannot go on forever it will stop’

So Bernanke’s policy is to keep expanding the problem. He’s got to keep blowing up the balloon. The balloon is now so expanded, so tight, that any hesitation results in a rush of air out. Keep blowing Ben!

Cullen doesn’t mention the External account. It’s supposed to be a key point between MMMT and MMT. However in line with Cullen’s ideas it’s the external account, or, more importantly, factors outside the US, that are the limiting factors here.

I’m not sure he does ignore the external sector – that’s why he has driven the US Dollar down.

If I remember correctly – i’m sure someone will know – exports as a percentage of the economy have picked up 3 percentage points or something like that since the start of the GFC.

So he’s trying to make US companies more competitive both internationally and at home.

As for UST’s that’s an interesting dance of death isn’t it. We need to issue and you need to buy because if you dont then the value of what you have, which is much more than the incremental bit we are asking you to buy now, falls in value.

I’m quite sceptical of the lack of confidence thesis, at least in relation to consumption. The household savings rate in the US is hovering around 4%, whereas the norm was +10% 20 years ago. The only way confidence could ignite the economy is if consumers spend more, by saving less or by borrowing. Is that really a healthy prescription for sustainable growth at this point?

I’m not averse to additional printing on principle, I agree that it is a necessary dimension of the deleveraging process. But I am more than a little wary of the ‘unintended consequences’, as the risks are often known as. Asset price inflation was the solution to the dotcom bust, which simply resulted in a much more serious calamity down the track. I can’t shake the concern that this solution will ultimately be similarly calamitous.

You are probably right at present about confidence and economic growth in the US

I bet the transmission mechanism with confidence and the economy has a varying utility that changes due to the stock of debt outstanding relative to incomes.

So on that basis is US incomes don’t grow much – which they haven’t for years then the only way you can get things moving is to generate more jobs and thus have more “income” in the economy.

That way you can get incremental growth in consumption without incremental growth in private debt.

Maybe???

But then you’ll probably just get a transfer off food stamps or you’ll get people paying down loans and so on. The key is the world needs to deleverage for monetary policy – both traditional and the new sexy stuff – to have any efficacy.

There are so many ironies in the FRB’s approach (and that of all the nonsensical efficient markets clowd — my word for a crowd of clowns).

The theft from savers has been immense, both via debasement of the currency and via forcing interest rates down. These savers, by definition, are the wealth-generating types (otherwise they wouldn’t have the savings in the first place).

The wealth generators are generally blessed in the intelligence dept and so (with perhaps the exception of the retired subset) they will be reading the writing on Ben’s wall and moving their wealth-generating activities to another shore that doesn’t steal so much from them.

And the irony that Ben is fundamentally trying to help the participants in the economy boost productivity and generate wealth!

Or maybe I’m giving him too much credit and he’s simply just trying to pig-headedly run his flawed economic theories into the ultimate (dead) end.

“The FED is going to just keep buying until the jobs market recovers.”

The thing is, I just don’t see the job market ever really recovering. Technological unemployment is accelerating and will continue to do so. As just one example, Boston-based Rethink Robotics is expected to release a new robot by January 2013 – something basic like a human sized torso with two arms possessing more degrees of freedom than a human and a head with sensors for example – that will be competitively priced and targeted at SMEs, and based on hints given by legendary founder Rodney Brooks is expected to be incredibly easy to program to do repetitive labour-intensive tasks simply by physically manipulating the robot oneself. Expect demonstrations and promotion all through 2013 with sales in 2014 and version 2 and more sales in 2015.

This is just one tiny example of smarter software and smarter machines that are being developed and which – by empowering individuals and producers to be so much more productive – will actively hamper and hinder any such thing as a recovery in the job market. In most cases those displaced will not be able to re-skill fast enough to get back in. While high end policy and strategy may achieve some successes here and there in creating more jobs, accelerating technological unemployment looks to me like a looming juggernaut that will destroy more jobs than can ever be created.

MB Fund

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